Flotek Industries Inc (FTK) 2008 Q4 法說會逐字稿

Good morning and welcome to the Flotek fourth quarter and year-end 2008 results conference call. All participants will be in listen-only mode. There'll be an opportunity for you to ask questions at the end of today's presentation. An operator will give instructions on how to ask your questions at that time. (Operator Instructions). This conference is being recorded.

At this time, I would like to turn the conference over to Brian Shannon. Mr. Shannon, you may begin, sir.

Good morning and welcome to the Flotek year-end 2008 conference call. Today's call is being webcast and a replay will be available on Flotek's website for seven days. The press release announcing the year-end results will also be available on the Flotek website. Before turning the call over to Chairman, CEO, and President Jerry Dumas, I'd like to remind everyone that some of today's comments may include forward-looking statements reflecting Flotek's views about future events and potential impact on performance. These matters involve risks and uncertainties that could impact operations and the financial results and cause our actual results to differ from our forward-looking statements. These risks are discussed in Flotek's filings with the SEC.

Now, I'll turn the call over to Jerry Dumas.

Thank you, Brian and welcome to all of you. We appreciate you joining our call this morning. Joining me today are Members of the Management Steve Reeves, our Executive Vice President and Chief Operating Officer; Jesse Neyman our Senior VP and Chief Financial Officer; Andrew Jowett our Chief Accounting Officer. In today's call, Steve will provide segment results and comments on our operations and Jesse will discuss our financial performance and our liquidity position. We will welcome questions after we complete our prepared remarks and we'd like to say to all of you that we're looking forward to a very interesting period of time of questions, we welcome those questions.

In the year 2008, we increased our total revenue for the fifth year in a row growing 43% to a total of $226 million. This revenue increase across, occurred across all three segments of our business. In our drilling product segment, we're pleased with growth assisted by acquisition of Teledrift. With the addition of this technology, with the addition of this technology we have achieved a significant increase in operating profit and additionally, in addition this gives a technological content to our down hole tube group which is one of our goals, is to continue to build the technological capability. Our proprietary chemicals continue to see greater growth and acceptance from our customers and increase activity could lead to gains in Artificial Lift.

Every year in the fourth quarter, we review goodwill and other intangible assets, given the general economic climate and having experience a decline in stock price in line with the market, management determined an impairment of $67.7 million was appropriate to write down goodwill to its fair value. Our net loss for the year was $31.9 million for our current year. Excluding the effects of the impairment, adjusted net income for the full year 2008 was $16.4 million or $0.85 per fully diluted share.

Jesse Neyman our CFO will provide further detail in our presentation. He will expand greatly on our credit facility changes which reflects the corporation and a support of our banking relationship with Wells Fargo, Prudential and Co-America. I personally continue to monitor closely our SG&A in cost and have identified $3 million in one-time cost that impacted to 2008. These cost related to increases in IT expenses, consulting and professional fees to improve assistance for reporting, severance costs and fees associated with the Teledrift acquisition. Although, we typically provide earnings guidance for the upcoming year with the current uncertainty surrounding the duration and severity of this downturn, it'd be difficult for us to provide earnings guidance with any great level of confidence, therefore we will not be issuing guidance for 2009.

My confidence in this Company and the employees that work side by side with Management is very strong. At this point, I would like to have Chief Operating Officer Steve Reeves give the segment performance. He will point out changes and events that affected our fourth quarter beyond the usually occurrences. Steve.

Thank you, Jerry. In our chemical and logistics sections year end revenue increased 26.8% to 109.4 million for 2008. Sales of biodegradable green micro-emulsion chemicals grew 37.2% to 77.4 million for the year. As a result of increasing fractioning activities and wider acceptance of micro-emulsion products by both independent and the major pumping companies. The operating income was 37.4 million in 2008, a 16% increase over 2007. However, due to rising costs of raw materials such as petroleum-based feed stock, operating income as a percentage of revenue declined to 34.2% for the year. The increase in costs was partially offset by price increase to our customers using these products. Investment in infrastructure for international initiatives and declining market conditions experienced in the fourth quarter also impacted our performance in chemical and logistics.

In response to declining market conditions and forecast for 2009, we've taken measures to size the segment to the marketplace and we continue to do those. One of our production chemical facilities will be relocated to our main -- to our Marlowe, Oklahoma facility. The chemical segment requires minimal capital expenditures; however, in keeping with our technology-driven strategy, we will remain active in R&D efforts and will maintain these costs as current levels as a percentage of revenue. We're experiencing pricing pressures of course from customers and will therefore focus attention on margin protection through managing our raw materials and all of our fixed costs.

Our drilling products revenue was 98.3 million for 2008, an increase of 73% on most over 2007. The Teledrift acquisition contributed more than 50% of this growth. Organic growth related to tool rental, services and inspection, and the expansion of our mud motor fleet provided the balance of segment's increase. While our initiative to develop Flotek shop subs and drilling jars replacing our sub-rentals had a minimal positive effect in 2008, we anticipate the benefits of these initiatives to be realized in 2009. Loss from operations was $43.8 million in 2008. Adjusting for the effective of the impairment of 59.1 million related to this segment adjusted income from operations was 15.3 million for the year-ended December 31, 2008. Approximately, 170% higher than 2007. Income from operations as a percentage of revenue increased to 15.6% for the year. The increase in operating profit was primarily driven by the acquisition of Teledrift and our expansion into higher margin tools, motors, and services. We also made many strategic investments in new North America sales facilities and we opened two new repair facilities during the year.

The drilling products segments requires higher levels of capital expenditures than our other segments. Capital expenditures in the year 2008 were approximately 20.1 million for the drilling segment. Due to current market conditions that began to develop late last year, we plan to reduce capital spend in this area by more than 50% in 2008. Our plan is designed to meet our maintenance capital requirements and provide opportunities to grow our business in the area of higher margin drilling jars and seal bearing motors as part of our strategic drilling products suite.

We're taking actions also to size the drilling products segment to the current marketplace through strategic actions that are focused on personnel and our fixed costs. Our decisions, while in reaction to the current trend are being made to provide us with the greatest flexibility to capitalize on the anticipated return to more normal market conditions sometime in the near future. Pricing remains very competitive and we are aggressively defend our market share with competitive prices and margin protection through bundling technology with commodity products. Drilling products will continue the initiative of replacing sub-rail drilling jars and shock subs with higher margin for proprietary tools. Additionally, we'll continue to draw our presence in the international markets through capital mud motors and the Teledrift line of MWD products including the new Telepulse MWD for horizontal drilling that we'll introduce in 2009.

Artificial Lift sales were $18.4 million for the year 2008. This was an increase of 23.8% over last year, primarily due to the very active coal bed methane drilling in Wyoming. A price increase implemented in August and an increase in raw pump sales. However, some of this was offset by an increase in our rough raw material products, our raw material costs, I'm sorry.

Loss from operations was 6.7 million for Artificial Lift for year 2008, primarily as a result of previously discussed impairment charge. An impairment of 8.6 million was recorded related to the Artificial Lift segment. Excluding the effect of the impairment, adjusted income from operations was 1.8 million or approximately 33.5% higher than adjusted income from operations of 1.4 million in 2007. Income from operations as a percentage of revenue increased slightly to 10% for the year 2008. We also made strategic investments in this segment by adding two new rough rod pump repair facilities and increased our field sales presence. Consistent with our strategy within our other two segments, we plan to reduce operating cost structure to align with current changing market conditions while maintaining flexibility to capitalize on our return.

In the first quarter of 2009, we instituted a reduction in workforce in response to a decrease in our customers drilling activity in coal bed methane and related pricing pressures. Our strategy is to focus on competitive pricing and exceptional service by offering our proprietary down hole gas separator technology and petro valve rod pump systems, especially in the international markets.

Now I'll turn the call over to Jesse for the financials.

Thanks, Steve. Our cash flow from operations contributed net cash of 24.9 million for year. Cash flow from investments was a negative 117.2 million of which 98 million was for the acquisition of Teledrift and 23.7 million was for capital expenditures. Cash flow from our financing activities contributed net cash of 91.2 million of which 155 million, were the gross proceeds from the issuance of our convertible bond and 27.6 million was the net amount repaid under our revolving credit facilities during the year. Our EBITDA for 2008 was 49.7 million.

The Company evaluated its goodwill and other intangible asset values in the fourth quarter of 2008 and we concluded that an impairment of 67.7 million should be recorded in 2008. Even though this analysis coincided with our annual goodwill impairment review, management felt that given current market conditions, the general malaise of the world economy and the fact that our book value was greater than our market cap a triggering event had occurred. We retained the services of an outside valuation consultant and an appraiser to assist in the valuation exercise to determine if any assets, both goodwill and intangible were impaired and to help us determine the fair market value of assets and liabilities necessary to compute the applied goodwill under the current market conditions.

The result of this analysis was the aforementioned noncash charge of $67.7 million and that is reflected on the December 31, 2008 financials for the Company. The impact of this charge was that as of December 31, 2008, we didn't meet the minimum net worth covenant contained in our credit agreement dated March 31, 2008. So on February 25, 2009, with the assistance of our banking, our lending group, we entered into the first amendment and temporary waiver agreement which amended the terms of the credit agreement. And this amendment, among other things, increased the interest rate margins applicable to the advances under the credit agreement to prevailing market rates. It decreased the aggregate revolving commitment under the credit agreement to $15 million from $25 million and that was by -- that was a mutually decided upon reduction. We felt that under the current covenant structure that we would not reach those availabilities anyway and so that was reduced to a more probable level and we were able to save commitment fees on $10 million. And it also provided a temporary waiver of any breach by Flotek of the minimum net worth covenant through May 15, 2009.

The amendment also permits the Company to exchange shares of its common stock for up to $40 million of our convertible senior notes, which otherwise was prohibited under the credit agreement. At the time we did the temporary waiver, it was contemplated that the first amendment in waiver would be followed in short order with a second amendment, to address the potential noncompliance within the next year of the leverage ratio and the fixed charge coverage ratio, covenants and that was determined by looking at projections for 2009 that we provided the bank.

Due to all these factors, we executed the second amendment to the credit agreement, which closed on March 13, and the second amendment, among other things, permanently reduces the aggregate commitment amount for our revolving credit to 15 million. It establishes a new interest rate matrix, again, at current market, as well as commitment fee levels. It limits our permitted maximum capital expenditures to $8 million in 09 and $11 million in 2010, and it establishes related new covenants related to the minimum net worth, the leverage ratio and fixed charge coverage ratio.

The CapEx limits that were set were based on amounts that we felt were necessary for maintenance CapEx and that was -- and the capital required to maintain the revenue projections that we had developed. Amortization schedules for the repayment of our debt were unchanged and the required payments of $2 million quarterly through maturity of the credit facility in March, on March 31, 2011.

So with that, I'll turn things back over to Jerry.

At this point we would like to turn the call back to our participants for any questions.

(Operator Instructions). Now our first question comes from Mark Brown, Pritchard Capital. Please go ahead.

Hey, Jerry, Steve and Jumpy. Under what condition would you go through with exchanging shares of common for the convertible debt?

Well Mark, we, as you could well surmise, we have looked at numerous strategies that, that would involve the conversion of debt or strategies actually that would entail repurchase of those shares. The amendment that we reached with the bank was with no particular strategy in mind, it was simply to give us the flexibility, if that opportunity presented itself, and we thought at that time that it would make sense to do that. I think the, sort of the seductive part of either repurchasing the bonds or converting the bonds is that long-term if you can, if you could bring them back, at the significant discounts at which they're currently trading, that might be attractive. However, there is a liquidity issue if we were to use cash or try to arrange some sort of borrowing to buy those back and then there's a dilution issue if we do a conversion. So, I guess the long-winded answer is that we simply have looked at all those strategies and we just want to be positioned incase an opportunity presented itself that made sense.

Let me further comment on that, Mark. I'm sure that when that part of the announcement was made, there were a lot of people who assumed we were presuming to do that immediately and thereby [dilute] to shareholders. That's the further thing from the truth at that point. We view the entire situation relative to our stock and relative to the marketplace that we're faced with as being one of liquidity. Clearly that's been our priority and because of the cooperation of our bank, and through the work of Jesse we have addressed that issue and we feel relatively comfortable. So with regard to looking at converting the bonds to equity in any fashion, we feel like our priority is to deal with the debt that we have with our bank and if in the future, improvement occurs in certain areas, then we clearly would continue to look at every avenue of improving the liquidity of our company. But obviously the priority was to work with our bank, the priority of our bank was to work with us and that has been accomplished and we're very comfortable now as we go forward into this very challenging year which is -- which is clearly, our objective to come out of 2009 in good health.

All right, , what, the new, have you changed the ratios for the, the three covenants that you talked about leverage, fixed charge coverage and minimum net worth? Or maybe you could comment in a little more detail in terms of if those have changed from the March '08 agreement?

Yes, they have and the, let me start with the minimum net worth. Essentially what will happen on the minimum net worth to accommodate the goodwill impairment write down, in the old agreement, the base net worth, booked net worth was the '07 net worth. And what, what we have done -- what we've agreed to with the banks is that we reset that to the 12/31/08 net worth and so the starting point would be 90% of that and then the calculation for each quarter, each subsequent quarter remains the same as it is in the current agreement. The fixed charge coverage ratio remains the same with the exception of one quarter and that is fourth quarter '09, which is a quarter where we anticipate things could be fairly tight. And that's been reduced from the 1.25 coverage. The leverage ratios are discrete for each quarter and I think if the agreement is being filed with the "K" so you'll be able to see what those are specifically as we go out through 2010.

I think one thing Mark, there might be an oversight, is looking at the fact that we attended to the issue of liquidity and Steve will get into more detail about how we sized our company to this marketplace that we're dealing with. Any other question from you? As we have other--

No, I'm good. I'll go back in queue. Thank you.

Thank you.

Thank you. Our next question comes from Sara Hunt of Alpine. Please go ahead.

Good morning, gentlemen. Can you talk more about where the debt stands now. There was some, you're paying 2 million a quarter, is there something else that goes on? I seem to remember the possibility of a further payment in April . Can you talk about where that stands since you didn't file a balance sheet?

Yes, good question, Sara. The "K" will be filed today, you'll be able to see that.

Okay, great, thanks.

-- this afternoon. There is an mandatory prepayment that will be required and it is calculated -- looking at our -- essentially our free cash flow as of 12/31/08 and that number's going to be roughly $3.6 million required prepayment. We'll make that April 15th.

Sara, we're currently at 34 million and at the end of March, we'll drop that down to 32 million and on April 15, we'll knock it down to 28.4, something to that level. That was the area we're paying attention to and our cash flow as projected and as performed and so forth is allowing us to handle that.

Okay and to switch gears and I'll let somebody else ask a question. I know you don't want to talk about what 2009 looks like, but can you talk about current conditions and what you're seeing now, versus what you saw at the end of last year? A lot of rigs have gone down now and then. A lot of us are involved in how that's affecting you and how it's playing itself out. Clearly with natural gas prices the way they are, I would expect to see a fairly low rig count once in a while. Could you talk about business conditions?

Sure, I'll take that up, Sara. This is Steve Reeves, thanks for the question.

Hey, Steve, how's it going?

It's a tough world, but a world I've lived in five or six times before. We're going to come out of this thing all right, making the right decisions. We have some places we'll hold up during the downturn. We're well aware rig count's off 45% and still going downward. We are making, when we talk about sizing to the marketplace to keep cash flows up, we've had a major round of reduction in force already, which will come up to about a $5 million savings for the year. We're trying to stay on top of the things we're consolidated some facilities and taking them out and at the same time, we're moving into some facilities. We just opened up in the northeast, in our Pittsburgh facility last week and are having very good success for early on.

So what we've done, we set triggers this year on rig count and national gas prices because that is such a big driver in our business. And as those triggers are met, we have action items we step up and look at to try to stay right in line with what is going on. We're well aware of each one that's coming, coming along. We're, we have built our business in the Hainesville, we're trying to focus where we see things in the northeast, in the Marcellus. The other side that we're on, we're pushing hard on our international activities to help pick some of this up. We expect to see some improvement in our Teledrift facility.

How much of Teledrift is overseas versus domestic?

Teledrift overseas is about 30% total.

Okay.

We do about 70 of Teledrift domestically. We expect that to pick up be it either through some of our stuff like Libya, contracts in Saudi and other focus we have. We also believe our MWDs will sell well, with translate well into international sales for Teledrift. So we are mitigating some of these things with international activities, and like I say, making the adjustments to trigger as it falls on down.

Okay, thank you.

In addition to that, Sara, I mentioned earlier in my comments that we have identified in IT, in our areas of consultants that we used, in our internal auditing, as required by [SOX] and [SOX] deal that we identified approximately three, and some reduction personnel which costs us some severance pay. We've identified about $3 million that are nonrecurring costs which we anticipate being able to take advantage of in '09.

And again, as a reminder, if you would like to ask a question, please press star then 1 on your telephone. We have no further questions at this time, sir.

All right, well thank you very much everybody. Have we got someone else that wants to ask?

I'm sorry, sir, I apologize. We have Mrs. Sara Hunt to ask another questions one more time. Wanted to follow that up, but I think she had already gotten rid of me so since there wasn't anybody else in the queue, I thought I'd ask another question if you don't mind. On the $3 million nonrecurring in 2008, that's above and beyond the $5 million you're talking about from personnel cuts and everything else that you already triggered for 2009 into cost savings, is that correct? Or two different pieces there?

That's correct. We also made another adjustment in corporate coming around. We'll be looking at probably another $700,000 that we identified. We're looking at these, Sara. We realize that the market is what the market is, but we'll be reducing costs across our entire group. Right now, as a matter of fact, one of the things that goes on, last year our cost of goods got a little out of control because we couldn't do anything about our petroleum feed stock products. We have driven those down significantly already this year where it won't make up for all of the loss of it. It will help us protect our margins. We're as aware of costs as we are of the lack of revenue we can generate with lower rig count.

I want to clarify Steve's comment. We identified another 700 or 750. We not only identified it, we actually acted on it. That reduction began effective April 1? So that's another reduction and that's a net reduction that will occur in the last eight months, nine months of the year.

Okay.

We're sizing the Company to what a 1,000 rig estimate will do for us.

Okay. So you're looking for 1,000 rig count.

I'm sorry?

You're looking for, you're, you're thinking about a world with a longer term 1,000 rig count for now. That's sort of what things look like?

I'm looking at a downturn that will take you to 1,000 rigs. Frankly there's all kinds of conversation about how long this thing is going to last. I can, I can give you a scenario where it will not last a long time. I can give you a scenario where it will. I don't know.

Yes, no, I think that's sort of the way of the world right now. That part I can appreciate.

Well, that's the life, the world we're living with right today. So we're basically, actually looking right now for the possibility of what we might do if the rig count stays at 1,000 for two years. And I, frankly, I just can't see that, but then, I can't see that far.

Right. Well, I mean, there's a lot of controversy, or at least questioning about the prolificness of some of these plays, means we don't have to go back to a higher rig count, but I think that will play itself out and we'll have to wait and see what happens there. I appreciate it and after I get a chance to look at the "K," I'm sure I'll check back with you with a couple questions. Thank you for now.

We'll be here all afternoon, up until everybody goes home for dinner. Which lately we've been going home for dinner at 10:00 in the evening. We'll be here. There's another gentlemen that wants to speak to us. Thank you, Sara.

Thank you , our next question comes from Jacob [Seggar], [Alameda] Investments. Please go ahead.

Hello, Jacob.

Hello, how are you guys doing? (Inaudible) Well, thank you. Jerry I know you talked last time about your personal plans on repurchasing shares.

And I'm going to, as soon as the corporate secretary tells me that the closeout period is open for me, I will do so. I've got -- I will do so. Because I believe in this Company. I think that the price of the stock is a very attractive price for me to pay. If other people agree to that, and Mr. Reeves purchased stock in the Company. I think he bought 100,000 shares -- and I intend to spend approximately $100,000 on stock on my first move as soon as I'm available, as soon as I'm allowed to do so.

That was about in the April timeframe, is that correct?

Our corporate secretary is standing here right now.

May.

May when?

Mid part of May. Middle of May.

Mid May .

It depends on when earnings are released for the first quarter. We're in blackout until that time.

Okay. I appreciate that and uh, thanks for the call, guys.

Thank you.

Now our next question comes from Tom Sullivan who is a private investor. Please go ahead.

Good morning.

How are you, sir?

I'm well, thank you. Given the performance of the Company this year, can you all comment a little bit about the recent grants given to you and the board of roughly half a million shares?

Well, what we've done is the Company has been, the Board of Directors, compensation committee decided to forego any cost associated with our compensation that would have normally occurred in a company. And put the board and the board and the comp committee made a decision to give us opportunity to share the performance, hopefully in a positive way with all of the other shareholders. If you will take a look at my salary, it has remained static for the last two years and as a result, my compensation is going to come from improvement in the shares, as it is the appreciation for the shareholders. We also have a group of individuals that we use these as an incentive to continue to perform. These are people we have great confidence in that will assist us in getting through these very difficult and trying times. We basically have given them the incentive of participating in the appreciation of the stock because there will not be any salary adjustments at all this year. For those people. Interestingly enough, Tom, are you still on?

Yes, I'm still here.

Interestingly enough, in this downturn, quality people are being solicited by competition as a matter of fact, we've been able to successfully bring aboard, I know of two very, very strong people we brought aboard that were -- would not necessarily have been available to us and we're taking this opportunity to upgrade and strengthen our organization in two or three different areas. So, as I said, interestingly enough, some of your best people are becoming available to other companies and we can't afford to lose people in that regard. I think Steve has made that very clear. In his organization.

Okay.

Thank you. There are no further questions at this time.

All right. Well, thank you very much everyone.

Thank you for participating in today's conference call. The call has now concluded. You may release your lines.